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The Streaming Startup That Could Break TV

The miraculous survival of an internet-streaming startup called Aereo may transform internet video and television forever. But not necessarily in the best way for consumers.

Posted on July 13, 2012, at 5:43 p.m. ET

An Aereo antenna array, with a bunch of broadcast TV antennas crammed on a tiny board.

An Aereo antenna array, with a bunch of broadcast TV antennas crammed on a tiny board.

We have all of the technology we need to have the television of our dreams. To have every video in the universe streamed to us, on demand, from our high-speed internet connections. To have live programming available or recorded for whenever we want to watch it. But, to paraphrase Donald Rumsfeld, we go to our sofas with the television we have, not the television we might want to have.

Enter Aereo, the Barry Diller-financed company that has devised a method for selling over-the-air television broadcasts — the programming that television stations are required to broadcast over the air in the public interest, which people are free to capture for their own personal use — via the internet. Currently based in New York, Aereo's technology captures all that "free" content, avoids all of those big fees to the big companies, and streams it to consumers via a clever application — you even get a DVR! — for $12 a month. Aereo, in other words, disrupts the whole system.

That system, if you're not familiar, works a little like this: The cable companies charge consumers. That enormous pool of money gets carved up. Channels negotiate with cable companies for their fee to be included in any cable plan to get a slice of that pie. Broadcasters charge the cable companies affiliate and retransmission fees. The broadcasters then pay out licensing fees to content creators, who sell their programming into this thicket of distributors and networks. Despite innovations everywhere, like HBO Go and Hulu, they got sabotaged and the system survives.

Aereo's business model is essentially built on regulatory arbitrage. Aereo has built a number of large "antenna arrays" in Brooklyn. Each array contains thousands of tiny antennas that are individually assigned to each Aereo user. Is this technological efficiency? No. The best, most innovative way to distribute awesome video online? No. It's technology designed to beat back a legal challenge. By finding a way to build tiny antennas and assign them to individual users, Aereo is seeking to circumvent copyright laws that prohibit companies from transmitting, en-masse as a "public performance," content to which they do not have a license.

So television's old guard — ABC/Disney, NBC Universal, Fox, CBS, big New York City broadcasters, like WPIX and WNET and PBS — have concentrated their powers, Avengers-style and sought a preliminary injunction that would shut Aereo down. And yet, earlier this week, Aereo prevailed. (Here is the decision.) The lawyers have their briefcases. It's just that Aereo's briefcase has thousands of miniature antennae in it.

The judge determined that Aereo's technology appeared tailor-made to fall just on the right side of the law, even if its business model could upend the cable industry. “This harm is not speculative,” the judge said. “In fact, Aereo has conducted surveys suggesting its services could prompt a substantial proportion of its subscribers to cancel their cable subscriptions.” Aereo could bring down the system — if it is legal.

Since Aereo will be permitted to continue to operate while the case continues, this legal controversy is about to escalate in court, in other business negotiations, and into the halls of Congress. Companies like Netflix and Apple will use this to try to renegotiate the fees they pay for online video. Aereo promises to aggressively promote their business and take cable's customers. And other engineers and entrepreneurs will use Aereo as a model for disrupting the industry while attempting to stay inside the law.

But television's incumbents are not going to take this lying down. They've already promised to appeal the decision and seek additional damages. And you can bet that the big companies will apply a full-court press in Congress to amend the relevant laws of copyright and broadcast distribution to shut businesses like Aereo down.

There are at least three morals to take from Aereo thus far. First, American laws should encourage true technological innovation, not clever legal end-arounds. (The system shouldn't encourage a company to build thousands of miniature antennae, nor should it encourage stick-up artists.) Second, when all of the technology exists to create a brilliant new service (our television utopia?), the law shouldn't get in the way. And third, as Omar Little from The Wire might tell you, if you come at the king, you best not miss. Now that the big media and broadcast companies are mobilized, we might end up with laws that are worse than the ones we have now. And that, irrespective of whether Aereo survives, would be the worst outcome, and a sign that the game is still the game.

An advocate for the Digital Age, Michael Phillips is an associate at a Wall Street litigation boutique (though he is not your attorney and this piece does not constitute legal advice for you!). He has been called a “thick-haired man” by the New York Times.